More and more Loan Originators I speak with are asking about debt settlement. Past and prospective clients are asking for help with consumer debt. They are worried they may soon be unable to make the minimum payments (or may have already fallen behind), they can’t consolidate debt like they had in the past using home equity, and they want to avoid bankruptcy.
What do you tell your clients?
Can you point them in the right direction when they need help managing or eliminating their unsecured consumer debt?
Can you tell them the difference between bankruptcy vs. debt settlement vs. consumer credit counseling?
If you consider yourself a mortgage planner or advisor to your clients, it’s important you understand what options they have available to them in managing and eliminating their debt.
Basics of Debt Settlement
Debt settlement is a legitimate option for consumers struggling with consumer debt who are looking for an alternative to Chapter 13 Bankruptcy.
The basic premise of debt settlement involves redirecting required monthly payments intended for creditors into a separate settlement account. Existing assets/savings can also be used. Once enough money has been saved, the negotiations begin. While specific results will vary, the goal is to settle a consumer’s debts for 50% or less of what they owe.
We’ll take a very simple look at the numbers (not taking into penalties, additional interest, fees, etc).
Let’s assume you owe $35,000 in credit card debt. Your minimum monthly payment is $700.
You can’t afford it.
You’ve stopped paying your creditors and start to put $500 a month aside for purposes of settling.
You have $6,000 you can pull from a ROTH IRA without penalties.
In 16 months, you’ve saved $8,000 (not including the $6k from the ROTH IRA).
You successfully settle for 40% of the original $35,000 saving yourself $21,000.
Sounds simple, right?
Unfortunately, many consumers who hire a third party debt settlement company are either not good candidates for debt settlement — or hire the wrong company.
Like in many industries that cater to financially desperate people – there are a lot of bad apples. In September, the FTC held a workshop to discuss the grossly unregulated industry. News reports of debt settlement firms being shut down or fined are not uncommon.
Bankruptcy winds up being inevitable for some. They owe more at the end due to interest costs and penalties than they did at the beginning of the process.
Some consumers tackle debt settlement on their own – but underestimate the process, risks, or the length of time it may take. Some are wildly successful.
In the next post, I’ll begin to cover some of the pitfalls associated with debt settlement. I’ll follow that up with some of the benefits. I’ll wrap it up with what I would look for in a debt settlement company.
In the meantime, feel free to contact me with any specific questions or if you need a referral to a reputable debt settlement firm. I hesitate to say this, but I know some will ask – yes – some will even compensate you for your efforts.
You have some wonderful insight and tips here; I agree you must be careful when considering debt settlement-and make sure that the blow to your credit score is worth it in the long term. Hiring a third party to consolidate should always be a last resort and researched carefully before choosing what company to go with.
This is very interesting. Wish you could go into some more detail about how consumers can pull off debt settlement without the help of a third party debt settlement company.
Ling – I’ll try and touch on it in future posts. The process itself is not complicated for a consumer and many have success on their own. Those that don’t typically weren’t good candidates for debt settlement to begin with or weren’t explained the risks associated with this strategy and were forced to go another way (sued by creditors, etc). There are also a couple of companies that coach/guide consumers to handle it on their own at a fraction of the cost of what other debt settlement companies charge.
My understanding is that debt settlement can be a lifesaver for those who are already in trouble and whose credit is substantially damaged. And they can’t qualify for a Chapter 7 discharge (‘cuz if your credit is that trashed why not just go all the way and discharge everything?).
But if you have decent credit I think bankruptcy can be a better choice. I had clients who paid their bills on time right up until their filing and within 6 months their scores were over 700 again. Can you do a debt settlement without first blowing off your bills for months? For example, can the threat of an impending BK be enough to get a creditor to play ball?
Gina – you are right. If someone qualifies for Chapter 7 — and credit is no longer an issue — that is almost always a better option. Chapter 13 on the other hand often is a longer process and costs the consumer more than an effective debt settlement strategy.
In most cases, creditors aren’t willing to negotiate a settlement until payments have been missed. Threat of a bankruptcy certainly helps, however, they need to be able to see that bankruptcy is a legitimate concern/possibility (not just a “threat”).
Chris great post. I think we all need to know this information as the economy and the market changes. so many times we jsut tell the borrower that we can not help but in reallity there is much we can do. I await 2 and 3
Thank you so much for your post! You really hit the nail on the head with this one. With the economy the way it is right now with all the layoffs and more to come; government spending and deficit out of control; the continued housing slump; one wonders where to turn for help. It sure is nice to know that there are debt management companies out there that can help folks avoid bankruptcy and still keep their heads above water. Thanks so much for the taking the time to post this information.
People seeking debt relief or help with negotiating their debts is about to explode. Credit card debt ran rampant the past decade. And out government encouraged people to spend. What we need is another generation of savers.
Choosing a Debt Settlement company
I was behind 3 months on my credit cards and looked into many different debt settlement agencies before I ended up choosing one.
I ended up going with a firm named Whitelight Financial http://whitelightfinancial.org/about.html and so far they have been a helpful
I choose them because
A. They had lower fees and took less upfront
B. They explained the Goods and Bads unlike the other companies
I spoke with they explained the DOWN SIDE of what they do as well
C. I looked into there credentials they had no complaints filed
with the BBB were listed with USOBA & TASC as well as having licensed debt Arbitrators on staff
D.They sent me previous settlements they that they have done with
my creditors for previous clients.
There seemed to be very knowlable and had a tax accountant on staff.
They have helped me so far settle 2 of my 5 accounts and asked that I post something somewere if I have been satisfied with there service
Which so far I have been.
If you can handle your accounts on your own I strongly suggest
going that route.If you are in need of help and are looking for a legit company I have listed there information below as well as who i spoke with.
White light Financial 1-877-378-3593
http://www.whitelightfinancial.org
I spoke with a Mike Cipriani
This looks interesting … looking forward for next version.
Debt Settlement is a process to settle your debts with the creditors. With debt settlement, a third party or you yourself negotiate with your creditors to come up with a reduced debt that you agree to pay. The reduction is usually between 30-60% of the total original debt amount.
I am amazed where this industry came out of no where it seems to be everywhere. When this is a thriving industry it does not give a good vision for our future.